Fast implementation: True SaaS offerings require no installation or technology investment for new customers and are completely configurable over the Web. For simpler self-service applications, a customer can start using the software immediately; for more complex business process automation software that requires configuration and data loading, go-live still occurs within a month or two. Customers start achieving benefits within weeks for no up-front cost, rather than spending millions and waiting many months for results.

High configurability: Next-generation SaaS offerings have been architected to avoid customization, which prevents having to spend significant time and cost in the implementation project and also avoids the "strait-jacket" of being locked in to current software version for years. Instead, SaaS software is highly configurable, allowing the customer to implement varied processes, business rules and data simply by changing switches in the software.

Continual upgrades: Upgrades are frequent, automatic and free with true SaaS offerings. New features are configured to be "off" until the customer wants to take advantage of them, but customers always have access to the most recent innovations and improvements in the latest version. In addition, SaaS providers are able to continually build in significant improvements to their software, primarily because their development resources are not wasted on maintaining many different software versions in a multitude of unique customer environments.

Best-practices expertise and content: In addition to building in more innovations and value into their software, SaaS providers often create add-ons that build in best-practices such as templates, content and configurable functionality for specific circumstances. Some vendors also provide best-practices consulting services and end-to-end implementation services to ensure that their solution achieves high adoption and dramatically improves the customer's business results.

How Do They Do It?

Multi-tenant architecture: True SaaS vendors use the same production environment to support multiple customers, allowing the software vendor to spread infrastructure and operations costs across many customers. With single-tenant software, a new installation will require purchasing servers, database software and other expensive infrastructure, but with a well-designed multi-tenant architecture, a new customer is simply "turned on" within the existing infrastructure, incurring no incremental costs.

Even when operated by the software vendor, single-tenant software still requires significant operations effort and costs each year estimated to be 43 to 57 cents per year for each dollar spent on software. With multi-tenant SaaS offerings, maintenance activities such as applying security patches have to be performed only once for all customers, greatly reducing both costs and risks of error.

One helpful side-effect is that SaaS vendors are motivated to make their software run as efficiently as possible within their data center, significantly lowering internal operations costs over time. The SaaS vendor is also able to invest in shared infrastructure capabilities that no single customer could ever justify, such as real-time monitoring, continual backups, system failover and redundancy, and disaster recovery capabilities providing world-class reliability and performance as part of the base service.

As mentioned earlier, a multi-tenant environment also means that true SaaS solutions are architected to be extremely configurable to avoid customizations. Thus, customization costs and implementation delays that customers incur are completely eliminated, both during initial implementation and with each upgrade, removing another significant cost of ownership for customers.

Single platform: Legacy application software was designed to be installed at each customer's site, using each customer's particular database software, servers and other infrastructure. Legacy software providers used to compete on how many different types of infrastructure components their software ran on, which required them to spend significant time "porting" every version of their software to all the various infrastructure components. This effort, which can take 30 to 40 percent of a firm's development resources, is completely obviated by the SaaS approach, which is built to run efficiently on a single infrastructure.

Also, legacy software providers typically build and maintain "abstraction" software modules to allow their software to run on many databases and operating systems, but because SaaS offerings run on a single infrastructure, these software layers are unnecessary and thus eliminated. By avoiding this wasted effort, SaaS providers are able to dedicate much more effort to adding value and functionality to their software, rather than building non-value-add infrastructure layers.

Single production version: Similarly, legacy application software providers must maintain all the old software versions that their customers run, while true SaaS solution providers only operate and maintain the most current version. Together with the porting effort described above, the total "maintenance" effort can take as much as 70 to 90 percent of development capacity for legacy software providers, according to estimates by The Economist. True SaaS providers eliminate all this wasted effort, greatly increasing the development efforts that they apply to additional functionality and new value to customers, as shown in Figure 1 below:

Agile software development approach: True SaaS solutions typically release new versions every few months to deliver new value to customers and the market, especially as new customers can need a specific feature to go live. Instead of customizing the software, this requires a fast-moving, business-focused development organization that delivers frequent releases. Fortunately, a next-generation development methodology called "Agile software development" has emerged that incorporates practices to deliver business value quickly, frequently and efficiently. True SaaS vendors have migrated to this approach because it meets the need for quick implementations with new features, and fast-moving ongoing software development.

Operational excellence: True SaaS vendors must not only build best-of-breed functional software, they must also create superior operational processes to deliver a consistently high-value SaaS solution to customers over the Internet. Successful SaaS vendors have invested significantly, ahead of customer demand, in technical and personnel capabilities around system monitoring, proactive issue resolution, capacity planning and investment, high-availability and disaster recovery, performance tuning, and system integration.

Designed for efficient operations: Since SaaS providers both design and operate their own software, they build it for efficient operations, with features like active monitoring, performance tracking, and easy diagnosing of issues. With SaaS, the provider performs all operations and maintenance rather than customers so the provider is motivated to minimize operations activities, reducing costs for them and cost of ownership for their customers.

A similar result can be observed from the automotive industry. Until the mid-90's, BMW owners used to pay for all service activities on their cars, and BMW recommended a 1,200-mile service check-up and oil changes every 3,000 miles. Now that BMW pays for service the first few years, they have redesigned their oil system and other high-maintenance systems to eliminate the 1,200-mile service check-up and require oil changes every 15,000 miles. Simply because BMW now provides the ongoing maintenance for the cars they design, they were motivated to design their cars to make servicing as efficient as possible, and they were able to reduce the service cost of a BMW by more than 80 percent. Similarly, in the next-generation enterprise software industry, true SaaS providers design their software for easy operations and low cost of ownership, since they incur all operations costs.

Pre-packaged solution, not "some assembly required": Legacy application software requires customers to become technical experts in the software how to install it, get it to work in their infrastructure, integrate it with other software, customize it with new programming, diagnose issues, and upgrade it. Owning legacy application software as a result involves significant training, ramp-up time for a technical project team, and paying for a large IT staff indefinitely. With SaaS, the customer doesn't have to learn anything about the technology, but can rather focus on how to use it effectively to improve their business processes, eliminating all the customer-incurred technical personnel and upkeep costs.

Full solution support: If a customer finds a software bug in installed legacy enterprise software, the software vendor must replicate the customer's unique environment (database, operating system, etc.) with the exact software product version, and then try to reproduce the issue often an impossible task due to the customizations in the customer installation or the customer's specific data. This can take weeks of work by the software vendor, and even then often the answer will come back: "We can't fix the issue because it is 1) due to a customization or 2) it's the responsibility of another software component (such as the database), or 3) you're running a version of our software that is too old." Even if a fix can eventually be provided, the customer must dedicate IT staff time to testing it, implementing it and validating it in production creating substantial cost and hassle for the customer. With true SaaS solutions, reproducing the issue is trivial there is only one version of software, the vendor has direct access to the customer's configuration and data, and well-designed SaaS solutions will even have notified the support team that an error occurred with diagnostic information. Just as importantly, the SaaS vendor is responsible for the entire solution, so there is no "pointing the finger" at other technology components as being responsible for the issue. The total time from reported issue to an implemented fix is typically within a few days, or even faster for mission-critical issues all for free and with no IT cost or time for the customer. As industry expert Amy Wohl has noted, "In the SaaS world, service needs to be impeccable." True SaaS providers must follow this principle in order to keep their customers and their monthly revenue.

Business process improvement: Along with providing a complete pre-packaged software solution, in order to ensure that customers implement quickly and achieve business benefits from their solution, true SaaS vendors also usually provide full-service implementation services, best-practices guidelines and templates for maximizing benefits from their software, and business process expertise to design, implement and continually improve a world-class process around the software. With legacy enterprise software, on the other hand, the customer must hire an implementation consultant and generate much of this knowledge internally through a protracted implementation project. True SaaS vendors not only provide higher-value software for far lower cost, they deliver improved business processes for better business results.

Recurring revenue business model: As a result of providing ongoing value and continual improvement to customers, true SaaS vendors increase their revenue every quarter, as customers more broadly adopt their solution and their solution is utilized more. Greater customer adoption and usage leads to higher subscription revenues every month. Legacy software providers, by contrast, rely on large up-front licenses to finance their business, and must be always hunting for the next customer to keep the business running.

As a result, true SaaS solutions significantly reduce cost of ownership for customers, in most cases to a small fraction of the cost for the customer to buy, install, customize and operate legacy application software. These activities generated considerable costs for customers of the prior generation of software, but the efforts turned out to be wasted, non-value-add tasks in deriving business value from the software, and are completely eliminated by SaaS solutions.

Finding and Working with True SaaS Providers

Signs That You Are TalkingTo a Legacy Software Provider in Disguise

Reluctance to pilot their solution: For a legacy software provider, performing a pilot implementation of its software for a customer is a huge investment that they avoid if at all possible. SaaS offerings, on the other hand, are built to pilot no installation or up-front investment, just log on and get started.

"Elephant hunting" sales approach: Legacy software providers try to enlarge the deal as much as possible to maximize their revenue before you discover the true benefit/cost ratio of owning their software. This has resulted in huge amounts of "shelfware" being purchased by legacy enterprise software customers. In fact, AMR Research has found that, as a result, 46 percent of Enterprise Resource Planning (ERP) license seats are unused! Because SaaS delivers real value very quickly, SaaS providers are very willing to start small and grow as their software solution proves its value at each step.

Try asking the software vendor, "what would happen to your profitability if you had no new customers over the coming 12 months?" Legacy software providers cannot survive long without new license payments, their recurring revenue doesn't cover their business costs, and they would have to downsize substantially. True SaaS providers, on the other hand, will have their revenues continue to grow as they further penetrate existing customers, and while their growth rate would slow down, their business would continue to grow and thrive.

Little new functionality: While talking with customer references, find out how much new functionality and innovation was made available in the last twelve months; legacy software providers who have more than a few dozen customers will find the majority of their development resources are tied up in maintenance, not creating new functionality. Also, make sure that the hosted software version doesn't "lag" new product releases with true SaaS vendors, new versions will be immediately implemented and available for all hosted customers.

Upgrade decisions: With true SaaS, upgrades are free, automatic, and invisible there is no need to plan or pay for upgrade projects, data migrations, or test environments, because all this is automatically and efficiently handled by the SaaS provider for all customers. With legacy-style enterprise software, however, upgrades are a difficult topic because every customer must decide when to incur the pain and cost of upgrading, or face being left behind. Behind the scenes, moreover, the legacy software provider must support multiple versions and upgrade customers one at a time in custom projects, leaving the provider with far fewer resources to add functionality and new value to the product.

Multiple instances: An "instance" of the software is a separately installed copy, and some software requires multiple instances to handle multiple languages, different business units, or different business processes. As you might imagine, this correspondingly multiplies the customer's cost of ownership and, more importantly, fails to provide rollup reporting or a consistent global solution. Some large companies are running dozens or even hundreds of instances of ERP software, and as a result cannot get a global or company-wide view of their processes or metrics. This has led to the next generation of ERP mega-projects for "instance consolidation," costing tens of millions of dollars. Many smaller software providers also have devolved into supporting multiple instances and multiple versions of their software, eroding their ability to provide additional value and full support over time to all customers. As you explore the flexibility and configurability of any enterprise software, look out for multiple instances in disguise.

Inflexible pricing: Legacy software providers will lock in revenue through committed payments, either up-front or over time, to match their high-cost business model. In particular, high and inflexible hosting costs indicate that the software provider will create a copy of their data center infrastructure just for you, locking in high costs and inflexibility over time.

Long implementations: While they may promise quick implementation during a sales meeting, find out through customer references how long it takes in practice until business benefits start to be achieved.

Software customizations: If the software vendor (or its implementation partner) ever professes to customize the software to add needed functionality, this indicates that the installation will be single-tenant, without free upgrades a legacy software provider in disguise, with all the inherent high costs and low flexibility. True SaaS providers implement all software changes within the core software product, enabling ongoing free upgrades and multi-tenant operations.

Internal integration challenges: Many legacy enterprise software offerings have grown through acquisition and by building separate product lines, resulting in multiple modules that must be integrated during the implementation project. More importantly, having many products with multiple databases, even from the same vendor, makes it much more difficult to extract consistent information on business activities, metrics and performance. Often, the hidden integration requirements do not come to light until implementation, when the process design uncovers the need to write custom software to integrate multiple modules. Ironically, some legacy software vendors even provide hosting services as a way to hide their internal complexity and integration challenges from customers. With true SaaS, there are no technical implementation surprises, there are no internal integrations to support the end-to-end business process, and all data is in a consistent global data model for straightforward access and analysis.

End-of-contract unknowns: Finally, customers who examine the options at the end of the contract term can uncover hidden costs and uncertainties, as repurposed legacy enterprise software may require upgrading or software customizations must be rewritten into the new product version, all at the customer's cost. With true SaaS offerings, the software is always running the latest version along with all other customers, so there are no hidden upgrade costs when renewing.

Maximizing Benefits from Software-as-a-Service

Choose SaaS especially for newly-automated, generic business processes: SaaS is ideal for a fast-moving, fluid business process, since SaaS requires low investment to get going, delivers fast benefits, and offers highly configurable solutions. New approaches can be tested, results can be validated before deploying widely, and best-practices can be learned and shared, all fulfilling the need for a flexible, highly adaptable solution.

SaaS solutions are most suited for business processes that are important but fairly generic across companies a "core business task, but not a key competitive differentiator."

In addition, true SaaS solutions can simultaneously provide global consistency and visibility where needed, and local autonomy and process configurability where it makes sense, enabling organizations to gain both compliance and flexibility where desired in the newly- automated process. For security reasons, SaaS is also ideal for "extended enterprise" solutions, where vendors or partners are also participants in the business process.

Align solution cost with business results: With SaaS, customers can align their IT investment on the SaaS solution with achieved business results. Some customers will want to "variable-ize" their cost structure, in which case transaction-based pricing is typically most appropriate. Some want a predictable payment each month; the SaaS provider should be able to accommodate all of these options. "Gainshare" pricing has been attempted in some cases, but due to difficulty measuring the baseline process performance and budgeting for costs, this approach has been largely discredited.

The key with SaaS is shared risk if the software does not gain adoption and deliver the desired business result, the SaaS vendor shouldn't gain revenue this is a central tenet of SaaS. [Note that this is also the fatal flaw with up-front licensing of legacy enterprise applications the software vendor's revenue isn't at risk if the desired business benefits aren't achieved or the software isn't even used, as all the risk falls on the customer.]

In addition to pricing that shares risk, follow-on software implementations should be tied to achieving business results in the first implementation.

Negotiate Service Level Agreements (SLAs) carefully: Since the application is hosted offsite by the SaaS software vendor, the customer relies on the software vendor to provide all the needed infrastructure, security and software support. Fortunately, the SaaS vendor is already highly motivated to provide a very good ownership experience, since the performance of the service will impact end-user adoption of the software and follow-on rollouts, which determine the SaaS vendor's revenue.

In addition, Service Level Agreements (SLAs) in the contract can be used to help manage key areas of risk by specifying how the SaaS vendor's service will be measured. The SLAs will require negotiation to match the customer's goal with the factors that the SaaS vendor has control over for example, response times are a result of the SaaS server response time, Internet traffic, customer network performance, and end-user PC browser performance.

Since the key goal is improving the business process, often the best answer is to monitor and regularly report on the overall desired metrics for periodic joint discussions about how to continually improve performance, since with SaaS, the customer and vendor are aligned in achieving and improving business results.

Be a willing partner with the SaaS software vendor: With a legacy software company, the customer's relationship with the software vendor is cursory at best the software vendor sends the box of software CDs to the customer, and the customer must work with implementation consultants to figure out how to install it, how to link it with other software applications and infrastructure, and how to configure and customize it to make it work best for their needs. At the end of the process, the customer ends up with all the knowledge of how the software was configured for them and how it benefits their enterprise; the software vendor has no idea how the customer is using the software in the field.

With a true SaaS offering, however, the software vendor provides implementation services and best-practices process design to quickly and completely deliver an improved business process. After implementation, the SaaS software vendor intimately understands the customer's business needs, how the software is configured to improve the customer's business results, and how the customer uses the software for what benefits. Every day the SaaS vendor gets real-time customer feedback about how its software is performing and delivering business benefits.

This allows the SaaS software vendor to provide much better software support, not just providing software features but, more importantly, supporting the business process and results the customer wants to achieve. Combined with frequent releases and automatic upgrades from true SaaS, this gives customers a new opportunity to provide timely and frequent input on how to improve the software to achieve their desired business results.

Leverage the software vendor's expertise: Because they provide complete services and they know how their software is being best utilized, true SaaS software vendors are experts in the business processes they automate, and how to gain the most business benefits from their software solution. Customers should leverage this knowledge during the implementation process design, in order to gain benefits that the customer may not even be aware of. In addition, the SaaS vendor also should provide ongoing assistance in using new software capabilities, process innovations, and best-practices to continually improve business results from the automated processes.

Take advantage of the new flexibility: SaaS allows customers to focus on their core competencies and their business processes rather than becoming experts on software internals, technology infrastructure maintenance, or deployment methodologies.

In particular, SaaS is aligned with many enterprises' desire to decrease IT infrastructure and maintenance costs, reducing the large and somewhat uncontrollable expenses for system administration, software maintenance, patch management and data center operations.

Where possible, take advantage of the greatly reduced software operations effort to redeploy resources to higher-value business functions, apply innovation to the business process to improve its performance, and focus on growing and augmenting the company's core competencies for competitive advantage in the market.

Conclusion

Significantly lower cost of ownership: Adding together all the hard and soft costs of installing, configuring, customizing, maintaining and operating the software, Jim found that the true SaaS options cost less than a quarter of the legacy software option.

Faster time-to-benefit: By going live within a few weeks, Jim could start delivering benefits to the first business unit by the next quarterly business review.

Lower risk: With no up-front technology costs and minimal time investment for the first implementation, if the solution didn't work as expected, Jim could easily stop the project or request the SaaS provider to improve the situation, which the SaaS provider would be very motivated to accomplish in order to keep Jim's monthly payments.

Continual improvement: With automatic free upgrades, Jim could take advantage of new functionality and innovations.

Better, single-vendor support: As CIO, Jim knew the frustration of multiple technology vendors blaming each other for issues, but with SaaS software, he has one vendor who is responsible for the entire solution, including the infrastructure, platform technologies, and performance.

More vendor expertise: Since the SaaS vendors implement the solution and work directly with end customers, they know how best to utilize their application and best-practices in process design, helping Jim to achieve his desired business results.